About a year ago I was watching a documentary about how some group of people (maybe Vikings?) may have used the ashes of deceased warriors as the source of carbon to make some of their steel weapons. So the first thing that comes to my mind, of course, is Dwarf Fortress. How cool would it be if a Dwarven brother having been struck down by a goblin, has his brother swear to avenge him. Said brother uses the ashes from the cremated corpse to make a sword and ventures forth to avenge him? Knowing Dwarf fortress though, that brother falls off a cliff, the next sister drowns, etc until some twelve year old with a full set of ancestral armor plus the solemn steel mug crafted from the ashes of his grandfather, Urist the Drunk.
Anyway most of the ancestral steel can be seen as roleplaying, but the mechanics to just craft the items seem like relatively low hanging fruit. I think it is possible right now to add in a smelter reaction to turn a Dwarven Corpse into coal. The real trick would be having relatives respect the weapon. Technically all entities could see it as semi-artifact weapon without any problems I guess, but that would be more for Toady to decide the specifics on.
Regardless I love the idea of legacy weapons/armor/items and I think it would provide a great incentive for players to keep going even after "fun" hits half the fort. I know I've straight rolled back to an earlier save when my legendary weapon smith got caught out by a goblin raid. I think it would also give the Dwarves something special to set them apart from the other species culturally. The downside would be players intentionally murdering immigrants to exploit the mechanic. As I mentioned, I've spent a lot of time mulling the idea over before pitching it here. There are buckets of opportunities for story telling, and start scenarios, but again there could be exploits as well.